Tuesday, June 5, 2007

Mortgage Rates Are Rising - How Will This Affect Home Prices?

Check this out... back in 2002, the yield on the 10 year treasury was about 3.5%. Mortgage rates, which are based off of that rate, were in the neighborhood of 4.6%.

So your monthly payment if you took out a $200,000 mortgage in 2002 would have been something like $1025.29 per month.

Fast forward to today. The yield on the 10 year treasury is about 5% (bloomberg.com) and rising. Mortgage rates are about 6.1%. Your monthly payment for the same $200,000 mortgage would be $1,211.99 per month. $187 dollars more per month purely in interest. Thats $2,240 more every year, or $67,212 dollars over the life of the mortgage, just because of the change in interest rates.

Can you see why so many people bought so many houses back in 2002? The monthly payments were pretty darn cheap.

It's impossible to predict where rates will go but it is easier to see them going higher rather than lower over the next couple years. Rates are another factor that affects demand for buying houses.

As many of you know, I'm hoping to buy a house within the next few years. I'm also hoping that increases in interest rates hopefully lead to more housing price reductions, because fewer people will be able to afford those higher monthly payments.

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